Market Overview
Markets are consolidating ahead of another key central bank meeting. This time the European Central Bank (ECB) is ready to announce monetary policy and after signs that the Eurozone economy is struggling again there may be a nod towards further monetary easing. The market is not expecting any movement on the deposit rate but with the end of the current bond buying program in March 2017 just six months away, the committee could extend the program by another six months and possibly even increase the program purchases from the current €80bn per month. However the more interesting and risk positive measures could be if the ECB looks to alter the way it buys the bonds with the “capital key” currently skewing the program massively towards German bonds, of which around 60% are unavailable for purchase. After some strong market moves on Tuesday, yesterday was more aligned to positioning ahead of the ECB. Interestingly in 2016 the euro has tended to react more positively to the ECB meetings which have been seen as having had too much expectation of a dovish Draghi ahead of the event. Could we again see this today? In other news, the Fed Beige Book last night showed that wage growth remained moderate and hampers the argument for a Fed rate hike, whilst Japan’s Q2 GDP was revised higher to +0.2% (from flat). China trade data also came in better than expected with imports +1.5% (versus -4.9% expected) and exports only -2.8% (-4.0% exp). Aside from some minor moves across the riskier currencies, the focus seems to be on the ECB today.
Wall Street closed all but flat last night with the Asian markets mildly lower (Nikkei -0.3%). European markets are also following this cautious mood early on with slight losses. In forex, there are slight gains for the commodity currencies in the reaction to the China trade data which was better than expected. Gold and silver have formed some support after a minor corrective move yesterday, whilst oil continues to recover.
The ECB monetary policy is the main focus at 1245BST today with the rates expected to be unchanged, whilst the ECB press conference at 1330BST is likely to be more interesting. The weekly jobless claims are at 1330BST (265,000 exp) and EIA oil inventories are at 1600BST (+0.4m barrels exp).
Chart of the Day – NZD/USD
After having spent the past few months in a sideways range between $0.6950 and $0.7340 the Kiwi has broken out. But is this a breakout to be trusted and chased higher? With a breakout confirmed on a two day closing basis the bulls have really put down a marker. The technical indicators are positively configured with the RSI pushing above 70 and the Stochastics rising strongly. However, the entire trading day was outside the Bollinger Bands yesterday and this suggests that perhaps the move is looking stretched on a near term basis. Furthermore, historically the RSI tends not to move too far above 70 before the profit-takers come in. Whilst this looks to be a strong move for the medium/longer term and the move has opened the next band of resistance from 2015 at $0.7605/$0.7745, the near term technicals point towards a consolidation or potentially a near term pullback. The hourly momentum indicators have dropped away as a consolidation has set in overnight. Interestingly also, the Kiwi has given little significant reaction to the strong China trade data, perhaps with one eye on the ECB later but also perhaps a sign of fatigue. The daily chart shows a band of support $0.7300/$0.7340 which would be decent area to look for the next buying opportunity if the Kiwi does look to unwind.. The bulls have already pulled back from a high at $0.7485 and is the initial resistance.
As the ECB monetary policy meeting approaches the euro has moved into something of a consolidation mode. The strong bull candle from Tuesday could not follow through yesterday and the bulls just gave some of the gains back as the outlook looks still mildly positive moving into the meeting. Momentum indicators have ticked higher with the Stochastics being a main reason behind a mildly bullish bias, whilst the MACD lines pulling higher again is also a positive for the bulls. The big support still holds at $1.1100 as the long term pivot, with the traded low around $1.1120 in the past couple of weeks and these are levels important going into the ECB. Expect the volatility to come during the press conference at 1330BST but anything that holds above the $1.1100 pivot will be seen as a positive. Market expectations for dovishness have tended not to be met in recent ECB meetings and it will be interesting to see if this could again be the case today and may help to underpin the euro and be the basis of support. Initial resistance is with yesterday’s high at $1.1270 before a reaction high at $1.1340 and then $1.1365. The hourly chart shows a minor band of support $1.1180/$1.1210 protecting the lows at $1.1120.
Cable has unwound some of the recent gains with a 100 pip reversal yesterday. This move has added an element of doubt for the bulls as the move back from $1.3445 has come just as the key medium term resistance between $1.3480/$1.3535 was coming into play. The bulls may now have lost the impetus for a potential upside break and could be the signal that this is indeed a medium term range play. If this is the case then sterling will be finding the barrier for gains coming in around the mid-$1.3400s. This also means that with the RSI turning back from just over 60 again (as it has done since May) and the Stocahstics beginning to roll over the upside potential looks limited. The hourly chart shows a broken uptrend and momentum indicators more neutral to perhaps even corrective again. This now means that a support band between $1.3250/$1.3350 is important for the near term direction. The rebound off yesterday’s low of $1.3315 will also be seen as an important near term support as a breach would re-open $1.3250 again. In order to regain some upside impetus the bulls need to push above a minor lower reaction high at $1.3390 before testing $1.3345. However the impetus seems to have been lost in this move higher and a near term range could be in formation now.
The resumption of the negative configuration within the downtrend channel on Dollar/Yen is still a bearish drag on the pair. The third consecutive negative candle just continues the deterioration and the momentum indicators are confirming that rallies should continue to be seen as a chance to sell. The Stochastics falling following the bearish cross is a classic signal whilst also having further downside potential. Additionally the RSI has dropped below 50 and the MACD lines have plateaued. However, interestingly the support form yesterday at 101.18 still remains intact today (there has also not yet been a negative reaction of yen strength to the better than expected Japanese GDP data). However on the hourly chart the RSI is now a key indicator, with the consistent lower highs in the past few days and now anywhere between 50/60 looks to be a limit of the bulls’ buying pressure. The near term pivot around 101.90 is a near term barrier with a small band 101.90/102.10. I expect further weakness in due course, with the support band 99.53/100.95 likely to be tested in the coming days.
Gold
After the strong bull candle of Tuesday the market has been consolidating in front of the ECB meeting. However this consolidation comes with momentum indicators having made a significant near to medium term improvement again. The gold price is still being held back by a downtrend that links the highs of the past two months, however, the RSI has already broken its equivalent downtrend, whilst the MACD lines are turning up once more and the Stochastics are rising strongly. The hourly chart shows that yesterday’s move was simply unwinding near term overbought momentum and I now see intraday corrections as a chance to buy. The initial support is a minor breakout level at $1341, which is holding, with the main near term support at the pivot around $1330. The main breakout would come on a move above $1357 which was a barrier through the middle of August, above which would open $1367 and the key resistance at $1375. Although gold is still a medium term range play (now in its 10th week of trading between $1300/$1375) I am a buyer into weakness.
WTI Oil
With the upside momentum gaining ground again the oil price is tracking higher once more. Yesterday’s bullish candle means three consecutive strong candles have completed and the outlook for the near term is improving by the day. This is a rally that seems to be backed by the bulls now with a test of the key overhead resistance between $46.40/$46.60 underway. The near term intraday corrections are being bought into as the chart posts a series of higher lows, the latest at $44.55. The daily indicators are turning higher to reflect the recent improvement. A break above $46.60 would open $47.50 initially but also the August reaction highs at $48.45/$48.75 would come back into play. The EIA crude oil inventories should be watched this afternoon at 1600BST, adding to the volatility.
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